More and more people these days have been switching from traditional IRAs to Roth IRAs.

They are doing this for the higher contribution limits, the conversion incentives, the inheritance benefits, and the lack of age-based distributions.

But there’s one key factor that prompts many people’s move to Roth: the ability to withdraw contributions without getting taxed, a tremendous feature that traditional IRAs cannot replicate.

However, we can probably expect any tax-free government program to come with considerable strings attached, and the Roth IRA is certainly no exception.

If you do not qualify for a Roth account, or if you do not make your contributions appropriately, you may find yourself unable to reap those tax-free benefits.

So how does one quality? How does someone insure compliance with Roth’s terms? Here’s a quick primer:

roth ira

1. Yearly contributions must fall below set limits and one’s taxable compensation.

Most people are aware that the Roth IRA comes with set limits above which contributions cannot exceed on a yearly basis. Currently, that limit is $5,000 annually for those who are younger than 50 and $6,000 for those who are older.

But there is one other stipulation here: if you are 40 years old and your taxable compensation is $4,000, then you can only put a maximum of $4,000 towards your Roth annually.

2. Your Roth must be an account or an annuity.

Although IRA stands for “individual retirement account,” a Roth can also take the form of an individual retirement annuity. Both approaches, however, have restrictions on the investments that can be made – restrictions that can vary based on location. And those who take the annuity route must ensure that they are working with an eligible life insurance company.

3. You must meet the income requirements.

The Roth IRA is designed to be ineligible for high-earning individuals. Currently, if you are a single filer and make over $110,000 in adjusted gross income, you are eligible only to make partial contributions to a Roth account.

If you make over $125,000, you cannot contribute to a Roth at all. These are the main rules to follow if you want to open a Roth IRA – and, more to the point, if you want to insure tax forgiveness when you withdraw money from the account.

While a Roth IRA does not make sense for all investors, it can be incredibly beneficial for those who don’t want a tax burden hanging over their head as retirement approaches. Just make sure that you know the rules and are in a position to play by them.

Photo Credit: PT Money

1 comment on “Is a Roth IRA Right For You?”

  1. Good post. Any idea on where I can get good summary info on after-tax 401(k) plans? Do they fall in the same category?

Comments are closed.